The danger of politicized foreign investment reviews

The U.S. framework for screening foreign acquisitions consists of two pillars: The Committee on Foreign Investment in the United States (CFIUS), which investigates national security risks; and the Department of Justice (DOJ) and the Federal Trade Commission (FTC), which control for potentially anti-competitive impacts. Everything else is left to domestic regulators, including labor rights, environmental protection or industry-specific rules. This approach has served U.S. interests well in the past, but the Smithfield deal has rekindled an old debate about expanding the scope of reviews to include other questions as well, similar to Canada’s “net benefit” tests. The reactions to the Smithfield takeover show that this would be a bad idea.

One key concern from proponents of expanded reviews is that Chinese ownership of a major meat supplier could harm food safety in the U.S. America indeed has regular food safety scandals, and there is a case to be made for better regulation of U.S. food chains. However, this has nothing to do with foreign ownership. Saying American food safety regulations (and other regimes) don't work well enough, so we should implement investment approvals is like saying the officiating in basketball is suspect so we should control who can own a team. Foreigners have to comply with U.S. rules as soon as they set foot on US territory -- which regulations those are should be a matter of domestic policymaking, not a foreign investment review board that lacks the expertise to make such calls.

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Another argument is that the government must investigate the potentially detrimental economic impacts on the U.S. economy, for example the transfer of technology or operations to China. Such an approach would copy Chinese-style industrial policy and give government officials power to decide which Americans can sell their property to the highest bidder. The case of Smithfield illustrates that setting rules for the marketplace and then trusting rational actors makes sense. For Shuanghui, doubling down on “Made in the U.S.” brand value and local staff is a no-brainer. Smithfield’s 2012 balance sheet shows "goodwill" and other intangible assets of $1.1 billion. If the new owners neglect to maintain quality assurance or move operations to China, it would quickly see those assets evaporate.

The U.S. should also not incorporate reciprocity requirements in investment reviews. The federal government needs to work on further opening Chinese markets to U.S. firms, but threatening to take the American private sector hostage is not the right solution. If China foolishly intrudes on private sector dealings in its own economy, why should the U.S. do the same? American leverage comes from its competitiveness and the attractiveness of U.S. assets, not from threatening to suspend the market economy until Beijing decides to do things the American way. China’s newly elevated leaders are conceding that they need to move in our direction and liberate the private sector from government intrusion – the moment when Beijing comes around to the virtues of private enterprise is not the right time for America to step up government intervention.

None of this is to say that national security is not important. In fact, we think it is far too important to be co-mingled with deeply politicized domestic debates. The U.S. needs a strong national security review system that looks at real concerns – in the case of Smithfield those might include supply contracts to the US army, or geographic proximity to U.S. critical defense installations. And there is room for improving the transparency and the process of CFIUS, which should be part of the debate in Washington and elsewhere. The economic and social concerns from foreign takeovers however are best handled by respective domestic regulators, who know their field and can make decisions based on rationality and expertise rather than political interests, be it competition policy, food safety or labor regulations.

Rosen is Partner at Rhodium Group, an economic research firm, and Visiting Fellow at the Peterson Institute for International Economics. Hanemann is Research Director at Rhodium Group. They publish and speak regularly on China’s global investment and advice public and private sectors on the implications from this new trend.